UBS Plans Its First European Counterparty Credit Risk CDO

UBS Warburg
is
structuring a EUR1.5 billion (USD1.48 billion) collateralized debt
obligation, which is its first euro-denominated securitization of
counterparty credit risk from its derivatives books. It will be
marketed primarily to European investors, but the underlying
collateral will be globally diversified, according to an official
familiar with the transaction. The purpose of the deal is to shed
credit risk and is a joint venture between the firm and its largest
clients. The deal allows UBS to take on more credit risk. Officials
at UBS declined comment.

The transaction is the second time UBS has sold
such a structure--the first was a USD750 million deal called
Alpine, launched at the beginning of last year (DW,
10/17/00).

UBS is expected to issue the deal in the next few
weeks. In the structure, UBS enters a credit-default swap on a
dynamic portfolio, which allows for substitution and is composed of
interest rate and currency swaps with Alpine II, a special purpose
vehicle. The spv then issues the credit-linked notes. UBS retains
the equity tranche of the deal, said the official, adding that
there will be five tranches. The size and rating of the tranches,
as well as the number of credits in the portfolio, has not yet been
finalized. Spreads on the tranches will be similar to balance sheet
CDOs.

The CDO has bullet structure with a seven-year
maturity and is non-callable for five years. The Alpine II
transaction, however, has an amortizing structure, where portions
of the principal are repaid annually.